Market Daily

Fixed Income Market Updates

EUROPEAN BANK COCO (AT1)

European AT1 space closed -0.125 pts (points). Euro-denominated AT1 was extremely well-bid. The dollar space in AT1 had much lighter flows. AT1s outperformed rates signficantly, as US Treasury yields were 25 basis points higher and AT1s were at highs in cash price. We prefer shorter duration AT1 with high resets. 

ASIA INVESTMENT GRADE (IG)

 China space was unchanged in spreads with higher outright yield offsetting a bit in the risk-off sentiment. For China state-owned entity space, overall better buying in Huarong front-end and two-way interest in the single A ones were seen. In Korea, it remained to be better buying in BBB space. In SEA, slightly better buying was seen in corporate bonds as the rates selloff brought out yield buyers.  Singapore dollar space saw slightly better selling as core rates sold off, with some financials and long-end corporate bonds were offered.

ASIA HIGH YIELD (HY)

China property rallied in beginning of the week as China announced plans to loosen monetary and expand fiscal spending next year. However, as there was no clear strategy to stabilize the property sector (just similar rhetoric to before), most of the gains were given back over the week.  Gaming continued to trade very firm with Asia PB and real money demand adding onto the US demand especially in the higher yielding tickers. In India HY,  most bonds -0.125-0.25 point lower post the overnight US Treasury move. The net selling continued with liquidity getting tougher into year-end, although bits of real money inflow buying helped to keep bonds near tight spreads. 

Forex Market Updates

USD.

The US Dollar rounded off its best week in a month on Friday as markets priced in the possibility of the Fed cutting rates more slowly than previously expected next year. Markets fully expect a cut at this week’s FOMC meeting, but are currently only pricing in a 24% chance of another round of easing in January, with March the most likely point for another move lower in rates according to CME. This is in line with Fed guidance of late, with policymaker Daly saying recently that she was comfortable with a rate cut in December but advocating “a more thoughtful and cautious approach” on further reductions in 2025.

The Dollar Index is likely to remain supported above 105.50 heading into this week’s FOMC meeting.

EUR

The Euro rebounded from three-week lows against the USD at the end of the week, although gains were capped by mostly dovish comments from ECB officials. Policymaker Muller, in particular, reflected growing concern at the central bank about the current level of interest rates vis-à-vis the Eurozone growth outlook, saying that he sees rates as being “too high relative to economic performance” and calling for another 100bps worth of easing by the ECB in 2025. His colleague Villeroy added that the ECB remains “significantly above neutral” and suggested that more rate cuts are in store.

The common currency continues to look heavy and could see a near term return to below 1.0450.

GBP

The British Pound closed the week with its third straight day of losses after data showed that the UK economy shrank unexpectedly in October, prompting markets to slightly dial up the prospect of speedier rate cuts by the BoE next year. This was also the first time since the onset of the Covid pandemic that UK GDP figures dropped in consecutive months, adding to a recent run of disappointing data for the British economy, with business surveys falling flat and trade data showing weakening momentum. Still, markets are currently pricing in an 87% chance of the BoE keeping rates on hold later this week with the next rate cut likely to come in February.

Sterling looks poised for a period of consolidation between 1.2500 and 1.2800 moving forward.

XAU

Gold prices retreated on Friday after hitting a five-week high in the previous session as markets digested the probability of a slower pace of Fed rate cuts next year. Given the precious metal’s explosive performance this year, analysts expect some unwinding of long bullion positions heading into the tail end of the year that could limit gains in the immediate horizon. Looking ahead, this week’s FOMC meeting is likely to see gold traders focus on Fed Chair Powell’s comments on the 2025 monetary policy outlook, especially in light of incoming US President Trump’s proposed tariff plans, which economists say would stoke further inflation.

The precious metal could see an extension of recent losses towards immediate support around the 2600 handle.